Herbalife knocked as illegal pyramid scheme

Wall Street fat cats try running stock up as critic tries to run it down

Herb Greenberg, who is in the enviable position of living in San Diego and being a regular on the New York–based CNBC TV business channel, this morning (July 24) said hedge-fund head Bill Ackman made a superb presentation this week when he said the multi-level marketer, nutritional-supplement company Herbalife is an illegal pyramid scheme.

Ackman in late 2012 bet $1 billion that Herbalife stock will fall. On Tuesday, he made a long, emotional presentation showing how the company is indeed a pyramid — not the first such presentation he has made.

Herbalife runs out of Los Angeles but is officially based in the offshore tax and secrecy haven of the Cayman Islands. In my judgment, that is extremely important in sizing up the management and governance of this company, although Greenberg didn't mention that this morning.

As soon as Ackman started talking Tuesday, Herbalife stock began rising and ended the day up 25 percent. Most commentators — and Herbalife — poked fun at Ackman. Not Greenberg, who watched the presentation, and earlier spent months studying multi-level marketing. Greenberg says Ackman made his case. (Today, Herbalife stock is down slightly, but that is not significant.)

A couple of other Wall Street fat cats are trying to run Herbalife stock up as Ackman tries to run it down. So, the stock movement might not have that much to do with the quality of Ackman's presentation.

The next move is up to the Federal Trade Commission and Securities and Exchange Commission. The Latin market accounts for more than half of Herbalife's business. That may deter typically weak-kneed regulators, who will often overlook fraud (such as in for-profit universities) if they think a number of people will be hurt by any stern action.

Comments

I remember when Herbalife was only in the kiosks at the mall. As it got more popular there were problems with the stimulant ingredient ephedra, heart trouble, especially if they took too much or worked out too hard, don't know, but they took it out. The founder Mark Hughes had arrest/jail for methamphetamine prior to his success I understand. I didn't know him but apparently he was a friend of Ed Brand. I just looked him up. He died in 2000 at the age of 44, by prescription anti-depressant and alcohol overdose in his 25 million dollar Malibu mansion. He is said to have been on a four day bender during the celebration of his maternal grandmother's 87th birthday. Long story short, an attorney, Jack Reynolds, was attempting to allow the heir's grandfather to keep control of the only son and heir's 40 million dollar trust fund inheritance. The mother (third wife of 4) sued in L.A. court and won. Grandpa got almost 2 million anyway. At the time of his death there was Herbalife, The Herbalife Family Foundation and The Mark Hughes Trust and according to what I read he was trying to acquire enough of his own funds to reclaim the company as a personal business. The health supplements aren't well regulated so believe what you read or not, and let the stocks fall if they may, shareholders have had a good run. Will check with you about how is this Ponzi, Don. It's your thing.

shirleyberan: Yes, there was controversy about Herbalife weight-loss products containing ephedra. It was San Diego's Metabolife that used ephedra widely in its products. Metabolife, too, was a multi-level marketer, but, unlike Herbalife, couldn't be called a pyramid. That was because -- tragically in some cases -- people actually bought the stuff. Some died.

According to Ackman, Herbalife is a pyramid because the money is made recruiting salespeople, not selling products. Ephedra was banned in 2004. Best, Don Bauder

shirleyberan
I remember this well.
The $40million was a custodial inheritance and his son gets the rest of the $400 million inheritance when he turns 35. Reynolds may be a lawyer, I don't know, but he is the grandfather, at least according to Hughes, who named him as one of the trustees in his will. The attorney was in question was named Klein and had been Hughes' attorney. There was some funny business about Reynolds trying to convert the inheritance into some sort of an investment partnership managed by Klein. There was something about the sale of some land that was part of the larger trust, some litigation and a bk in in there someplace. Basically, the judged ruled that what they did violated probate codes and kicked all of the trustees and Klein out.

shirleyberan: As I said in my response, there was controversy about ephedra in Herbalife products, too. And the fellow who died of an overdose at age 44, as you related, was the head of Herbalife. Best, Don Bauder

Herbalife looks like a duck, quacks like a duck, and swims like a duck, er, pyramid scheme. That doesn't prove that it is, but it is highly suspicious. What sets Herbalife apart is its longevity. Most of the real out-and-out pyramid operations come and go within a three or four year period, about the time it takes to fill up the pipeline with its useless product(s). If this one can still be going after more than twenty years is either testimony to the efficacy of its products and the actual sale of them to end users, or to being far more clever than the usual pyramid. But I know of nobody who ever mentions actually using Herbalife products, and never hear any freely-offered testimonials about them. It must all be in the sales pitch, and pyramids have had some very persuasive stories to tell.

Visduh: Perceptive comments. With more than 60% of its business being with Latins, you may not come across Herbalife peddlers -- or users, if there are any. I agree with Ackman that this company survives recruiting new salespersons, not selling products.

Speaking of: have you ever gone into a house and seen a bar of Amway soap? Best, Don Bauder

Amway was not the same as many of the MLM operations in that its reps actually did sell products. I knew of a couple who swore by a couple Amway cleaning products (grossly overpriced, of course) they used. One was specially intended for those fiberglass molded showers and tubs that were so popular in tract homes thirty of forty years ago. So, yes, I do know of one very old example of Amway being used by satisfied customers.

This whole concept of multi-level marketing makes little sense when you realize that many layers of middlemen (or middlepersons, if you insist) have to take a cut from the final price paid by the consumer. In recent decades, and especially in the age of the computer, distribution channels have been simplified and shortened. MLM is just the opposite of that trend, and that is one thing that makes it highly suspect.

Visduh: Excellent points. If memory serves me right, it was either Amway or Shaklee that admitted in a government filing that if it didn't keep recruiting new salespeople, it would have financial problems. Best, Don Bauder

That was gonna be my next experience to relay. It was a popular way to do business in the 80's. Tell your friends they can make a lot of money, have (Tupperware parties) pressuring them to buy large quantities to sell. Then more than likely they can't sell it and just use it themselves to get rid of it. "Special" vitamins or whatever.

shirleyberan: I have reported on multi-level marketers for probably 30 years. The people who jump into each new company, whatever it happens to be peddling, are quite often the same. They are MLM junkies, leaping into each new one, after being skinned in the last one.

The same phenomenon is evident at gambling casinos. It's an addiction. Best, Don Bauder